Even at this late stage we still do not know what form Brexit will actually take and when it will actually occur, however, in respect of disputes with an EU / UK cross-border element we do know what will happen to those disputes in the event of a 'no deal' Brexit, and what may happen during any transition period. This note looks at the changes that will occur to UK law on 'exit' day and what you can do to mitigate the risks those changes will bring.
Brexit is most likely to affect disputes where one party is based in the UK and the other party is based in a remaining EU member state, or where the dispute itself has some connection to a remaining EU member state. Much depends on the specific facts of the dispute, where the proceedings are issued, and more importantly on the outcome of the negotiations between the UK government and the EU.
At the time of writing the UK will either leave the EU on 29 March 2019 ('exit' day) at 11pm (a 'no deal' Brexit) or under the terms of a negotiated withdrawal agreement between the UK and EU (also known as a managed withdrawal). If the UK exits with a managed withdrawal agreement in place, the UK and EU will enter into a transition period which will begin on 30 March 2019 and last until 31 December 2020.
Practical Steps to take right now
Listed below are some of the practical steps you can take now to help reduce the risks that the decision to leave could give rise to in relation to cross border disputes:
- Irrespective of whether there is a managed withdrawal or a 'no deal' Brexit parties who are negotiating contracts should think carefully about their dispute resolution and governing law clauses; these clauses should be drafted to make clear which courts are to have jurisdiction in the event of a dispute and which law is to govern the contract. English governing law clauses should still be recognised after exit day by the courts of EU member states so there is little risk in keeping these clauses or inserting them into future contracts.
- We recommend you seek specific advice on your jurisdiction provisions. The issue of which courts are to have jurisdiction in the event of a dispute remains complex. The rules contained in the Recast Brussels Regulation will no longer apply to the UK in the event of a 'no deal' Brexit or following the end of the transition period (apart for some retained provisions in consumer and employee disputes). When negotiating contracts consider where any potential dispute may be located. If this is in England & Wales, or you would like any potential dispute between the parties to take place in the courts of England & Wales, we suggest selecting an exclusive jurisdiction clause in favour of the courts of England & Wales. There are greater risks of potential parallel proceedings if your contract includes a non-exclusive jurisdiction clause or an asymmetric jurisdiction clause.
- If your counter-party is domiciled outside of England & Wales but your contract contains a jurisdiction clause in favour of the courts of England & Wales, you should ensure that your contract contains a clause obliging your counter-party to appoint a process agent in this jurisdiction to accept legal proceedings. This will ensure you will be able to serve proceedings on them without any difficulty.
- Parties who are in possession of a UK court judgment which needs to be enforced in another EU state should take steps to enforce it as soon as possible, as enforcement will not be as simple after 'exit' day under a 'no deal' Brexit. If this cannot be done, then seek specific advice as to how you might enforce a judgment in an EU member state where you have exposure (or may do, if you are concluding a contract with a party with no formal presence in England & Wales).
- If you have an ongoing dispute that will not conclude by exit day, it is advisable to seek specific advice as to whether it is vulnerable to any changes that may occur. Assuming there is a managed withdrawal, proceedings with an EU element which have already been issued are unlikely to be affected by the vote to leave, as the relevant EU rules will continue to apply. There may, however, be increased uncertainty in relation to particular types of claims (for example, those based on the EU competition regime) which are constructed on rules which are part of the Brexit negotiations.
- Arbitration will be unaffected by the vote to leave and consideration should therefore also be given as to whether arbitration (if suitable) would provide greater certainty as a method of dispute resolution.
To what extent is EU Law relevant to disputes with a cross-border element?
In order to facilitate access to justice and judicial cooperation between member states, EU law has laid down rules which apply to parties in member states litigating disputes with cross-border elements. The four principal areas relevant to parties litigating disputes dealt with by EU rules concern:
- The courts which are to have jurisdiction over the dispute. These rules are largely contained in the Recast Brussels Regulation;
- The law which is to govern the parties' obligations (both contractual and non-contractual), set out in the Rome I and Rome II Regulations;
- The recognition and enforcement of court judgments. These rules are also largely contained in the Recast Brussels Regulation; and
- The service of court documents and the taking of evidence.
Cross Border disputes in the event of a 'no-deal' Brexit
In the event of a 'no deal' Brexit the majority of EU legislation relating to cross-border disputes will disappear from the UK statute book.
The European Commission ("EC") and the UK government are of the view that EU rules on jurisdiction for cross border disputes for proceedings pending on 'exit' day will continue to apply; however, the EC does not consider that this should be the case for the recognition and enforcement of judgments or for other judicial co-operation procedures. This will result in an imbalance in the position taken between the EU and UK in some scenarios. Parties are advised to take legal advice if they consider their disputes may be affected. For more detail, see the sections immediately below.
Jurisdiction and the recognition and enforcement of judgments
The UK government has agreed to accede to the Hague Convention on Choice of Court Agreements 2005 ("the Convention"). The Convention provides a worldwide framework of rules in relation to exclusive jurisdiction clauses and the recognition and enforcement of those judgments based on such clauses.
The Convention only applies to agreements containing an exclusive jurisdiction clause in favour of the courts of those states that have ratified the Convention. At present, those states include the EU along with Denmark, Mexico, Montenegro and Singapore. In addition, the Convention does not apply to non-exclusive jurisdiction or asymmetric jurisdiction clauses even between states which have ratified it. If you would like more information on Brexit and the Convention please click here.
In relation to the recognition and enforcement of judgments, as mentioned above, the UK and EC have taken different positions in relation to the enforcement of some judgments handed down prior to 'exit' day. The UK government has stated that the enforcement provisions within the Recast Brussels Regulation will remain in place for any judgment given prior to 'exit' day. In contrast, the EC has said that it will depend on what stage of the enforcement process the judgment has reached. If you have a judgment that may be affected advice should be sought immediately.
The Convention will apply to the enforcement of any judgment after 'exit' day if that judgment is obtained in respect of an exclusive jurisdiction clause that falls within the ambit of it. In matters where the Convention does not apply, parties to these disputes will rely on existing UK common law rules and statutes, and/or the national law of the relevant EU member state. Local legal advice will need to be sought in the relevant jurisdiction regarding the rules that will be applied, costs and time limits.
On the issue of the law governing parties' contractual and non-contractual obligations, Rome I and Rome II will be incorporated into domestic law in the event of a 'no deal' Brexit. This will create certainty and continuity between the current EU and UK legal frameworks as these rules are not reliant on reciprocity.
The courts of member states will continue to apply the rules set out in Rome I and Rome II to disputes which may have a UK element. This means that if a Spanish court was considering the governing law of a contractual obligation, and determined – applying Rome I – that English law should apply to the parties’ relationship; English law would still be applied by the Spanish courts notwithstanding the UK’s status as a non-EU member state.
It is important to note that the EU rules on jurisdiction, governing law and service do not extend to arbitration, and therefore, Brexit will have little immediate impact on this area of dispute resolution. This is also the case with regard to the enforcement of arbitration awards which is governed by the New York Convention and not by the Brussels Recast Regulation.
Service of documents and taking of evidence
The Regulations covering the service of documents and the taking of evidence will no longer apply to the UK following Brexit in the event of a 'no-deal' Brexit. For service of documents, the UK will rely on The Hague Service Convention (the "Service Convention") . If the Service Convention does not apply, existing UK common law rules and statutes, and/or the national law of the relevant EU member state will apply instead to the issue.
So far as taking of evidence is concerned, in the event of a 'no-deal' Brexit the UK will rely on the Hague Convention on the Taking of Evidence Abroad (the "Taking of Evidence Convention"). In circumstances where the Taking of Evidence Convention will not apply, existing UK common law rules and statutes, and/or the national law of the relevant EU member state will apply instead.
Cross Border disputes in the event of a 'managed withdrawal'
In order to provide a managed withdrawal of the UK from the EU, the UK government and the EC have negotiated a Draft Agreement on the Withdrawal of the UK from the EU and the European Atomic Energy Community (the "Draft Withdrawal Agreement"). The Draft Withdrawal Agreement sets out what will happen on 'exit' day. It also provides for a transition period that will begin on 30 March 2019 and last until 31 December 2020. During the transition period the majority of current EU law will remain applicable to the UK . Provided that the existing proposals contained in the Draft Withdrawal Agreement on cross border disputes are not amended, the current rules will remain in force for the present, during the transition period and after the end of the transition period for disputes in which proceedings have already been issued when the transition period expires.
What will happen at the end of the transition period?
At the moment we simply don't know. The UK and the EU need to agree a framework for their future relationship. Without such an agreement, at the end of any transition period, EU law will cease to apply to the UK and the position will be the same as if there had been a 'no deal' Brexit on 29 March 2019.
Overall, the picture is getting clearer and this is welcome. But Brexit does mean that for parties who are involved in cross border disputes with an EU dimension some aspects of that litigation may no longer be as simple as before, and local advice will need to be taken increasing the time any dispute will take and of course, the costs involved.